IN THIS CHAPTER

Learning about digital-currency background

Smart scaling and mining deployments

Ensuring your mine remains profitable long term

Timing your entries and exits

Mining alternative cryptocurrencies

In the cryptocurrency mining space, revenue is important, and profit is critical. You do not want to spin your computational hash cycles for zero gain, and you want your investment of time, mining hardware, electricity, and other expenses to pay off. We have compiled a list of ten things that will help you become profitable and receive a return on investment (ROI) in your cryptocurrency mining adventure.

Doing Your Homework

Doing plenty of research and study prior to jumping into the cryptocurrency mining space in any capacity is crucial. It’s a complicated arena, with plenty of room for error, and cryptocurrency mining is not a quick walk in the park. We discuss the ROI calculations and math exercises required to see projections of mining returns in Chapter 11; study those carefully.

If the mining gear you plan to acquire and deploy is not profitable or the market is in the midst of a large downturn, you may be much better off simply buying the underlying cryptocurrency asset you intend to mine from an exchange. We cover a few reputable exchanges to use in Chapter 13.

Setting up hardware and software can be complicated, too, in particular if you decide to build a GPU mining rig from the ground up! Before you start, study.

There is no rush! It’s better to take your time and get everything right than to jump in without being fully prepared and lose money. Better in fact, if your research leads you to not mine cryptocurrency, than if you do little research, jump right in, and fail. If the cryptocurrency markets survive and is no short-term fad, you have plenty of time to get in and mine. And if they don’t? Well, you haven’t lost anything, have you? (We think they’ll survive!)

Timing Your Entry

There are good and bad times for cryptocurrency mining. For example, during the Bitcoin and cryptocurrency market boom in 2017, mining hardware was practically sold out from many of the original mining equipment manufacturers. Much of the most efficient and cost-effective (profitable) cryptocurrency mining equipment was being resold on second-hand marketplaces at prices above the brand-new-from-a-manufacturer price, virtually eliminating any projected gains of mining with that gear.

And, of course, the market declined dramatically starting in late December 2017, and still, at the time of writing, has not fully recovered. (It’s still around three to four times its post-December 2017 low, though.)

While December 2017 would have appeared, to many outsiders, to be a great time to get into cryptocurrency mining, the conditions were actually quite poor, and hardware speculators were extracting as much out of the market as they possibly could.

Often, in the Bitcoin and cryptocurrency space as with many traditional markets, the best time to enter into the fray may be when the perceived outlook is the worst. During these market downturns, Bitcoin and other cryptocurrencies may trade at a reduced rate, and profitable mining hardware may hit second-hand marketplaces at steep discounts, (You may be able to acquire hardware directly from manufacturers during this time as well.)

Baron Rothschild, an 18th-century member of the infamous banking family, reportedly said that you should “Buy when there’s blood in the streets, even if the blood is your own.” What he meant is that it’s a good time to buy when a market is crashing; you’ll buy the assets cheaply, and they’ll recover eventually.

The timing of your entrance into the cryptocurrency mining space may very well determine your success. However, you may not want to wait too long, as the old cryptocurrency adage goes: “The best time to mine (or buy) cryptocurrency was ten years ago, the second-best time is now.”

Playing the Markets

Many cryptocurrency miners increase their profits by actively trading on exchanges, even buying on one exchange and selling on another, exploiting the differences in prices between exchanges in a form of arbitrage.

However, this subject is totally different from cryptocurrency mining, of course, requiring different skill sets, knowledge, and strategies.

In many cryptocurrency markets, trading provides needed liquidity, and traders help absorb some of the volatility. Keep in mind that tax liabilities are likely incurred from actively trading (see Chapter 13). However, a few smart trades a year can multiply profits significantly, and if you do have a tax liability, that may be a good thing. (It shows you have made gains on your trades!)

Once the conversion has been made from mined cryptocurrency to local fiat currency, the mining ROI calculations for those mined cryptocurrency rewards are locked in.

While quickly trading for fiat-based returns is an effective strategy for some miners to boost their ROI, it isn’t recommended for everyone. Tread and trade lightly. Obviously, we don’t teach trading strategies in this book, so you have another learning journey in front of you before you can trade safely.

Identifying Low Hash Rate Alternative Cryptocurrencies

If your ROI and profit calculations for the cryptocurrency you are mining show that you’re losing money, you have another option beyond mining through the downturn or shutting down your mining equipment and taking the loss on hardware investments. You can switch cryptocurrencies.

Miners often study the mining profitability on other cryptocurrency blockchains to see whether they’d fare better mining a less popular cryptocurrency. Just because your current cryptocurrency market is in trouble, it doesn’t mean all cryptocurrency mining is unprofitable at the same time. You may be able to find a more profitable cryptocurrency. In fact, it’s often possible to find a smaller cryptocurrency that offers a better ROI than the larger, better known cryptocurrencies.

These smaller cryptocurrencies generally have a lower price per coin on the exchanges, but price per coin is not an indication of profitability. What counts is how much equipment and electricity you need to use to mine each dollar’s worth of the coin.

Smaller cryptocurrencies also have lower network hash rates, which means you can contribute a larger percentage of the hash rate and gain a larger percentage of the mining rewards. So, the coins you mine are worth less, but you will likely mine more of them.

So keep an eye on other cryptocurrency markets, in particular the ones that you can mine. That is, if you’re mining with ASICs, you don’t need to watch all the other markets, just the other cryptocurrencies that work with the algorithm your ASIC was designed to mine. (See Chapter 8 as a starting point; we group cryptocurrencies by algorithm there.)

If you’re mining with a GPU rig, your choices are broader. You will have the flexibility to mine many different cryptocurrencies, using many different algorithms, on low hash rate cryptocurrencies. You’ll want to watch what’s going on with these other cryptocurrency markets, and of course, before you jump, you’ll need to run the numbers and see whether they work for you (see Chapter 11).

Be careful, however, as many small market value and hash rate cryptocurrencies do not have the type of blockchain security that other cryptocurrencies boast. Smaller cryptocurrencies also tend to lose value over time, and may experience significant price fluctuations, so you’ll want to be quick on your feet. Get in when it makes sense, get out when things start to go badly.

Mining the Start of a Chain

Mining a brand new cryptocurrency can sometimes be very profitable (and, like everything in cryptocurrency, sometimes not).

When a new cryptocurrency is launched, there is often a short period of euphoria, during which all the promises and hype of the launchers serve to pump up interest in the new currency. Typically, despite their propagators’ best efforts, the new currency does not last, or at least does not remain valuable. However, some of these new blockchains may have significant value for the first few days after launch, possibly even months, as originally the coins on these cryptocurrencies are inherently scarce (assuming there isn’t a large pre-mine associated with it), and traders may value them at a premium.

A pre-mine is what those in the cryptocurrency space call a cryptocurrency blockchain that was launched with coins already in existence from nonmining activities, typically though a crowd sale, initial coin offering (ICO), or other early adopter distribution method. Pre-mined cryptocurrencies have been criticized by the mining community as being unfair and unfriendly to miners.

Extreme early mining profitability has been the case for a few different coins in the past, including Zcash, Grin, and many others. You can see the example of Zcash in the CoinMarketCap chart shown in Figure 15-1. In the first few hours of the cryptocurrency’s life, it reached more than $5,000; within a couple of days, it was worth a tenth of that value.

This kind of profile is very common. Here’s a little experiment for you. Go to www.coinmarketcap.com and experiment with a few charts. Pick some of the smaller, less popular cryptocurrencies and look at their charts. Adjust the date range to the first week or two, or month or two perhaps, of the cryptcurrency’s life, and you’ll frequently see the same kind of profile. In Figure 15-2, for example, you can see the first two months of WAX’s life. It started out around $4.60 to $5 a coin, but declined to around 50 cents within a couple of days.

Thus, mining a brand-new cryptocurrency can (sometimes) be very profitable if you’re there right at the start. You can mine with GPUs, or even CPUs in some cases, as ASICs have not yet had the time to develop for their algorithm (unless, that is, the new cryptocurrency is using an existing, ASIC-developed, algorithm, of course).

Unfortunately for many newly created cryptocurrency systems, healthy network effects and other aspects of a successful cryptocurrency are difficult to create, so many tend to lose value against other assets and local fiat currency over longer periods of time, or even fairly quickly. (Refer to Figure 15-2; WAX started high, but dropped within a couple of days.) However, there may still be an opportunity in some of these systems for enterprising miners who may be able to direct their computational hash power toward the chain early and quickly exchange their rewards for other more proven systems as well as for local fiat currency. (You’ll want to sell off your new coins within minutes or hours in some cases.)

Starting Small

The best way to test out the waters in any business endeavor, and particularly in the cryptocurrency mining industry, is to start small. This is especially true for beginners new to the space; you have a lot to learn, so your first mine will be a big experiment.

Starting small also makes any losses less painful, of course. If you don’t manage to create a profitable mine, your losses are limited. Starting small is a great way to build the skill sets and learn the lessons needed, discovering what works well and what may not. Once you have everything figured out, then you can scale up.

Scaling Choices

Rapidly expanding in the cryptocurrency space can lead to many unforeseen issues, such as increased burn rate and an evaporated runway. (Chapter 13 has more information on this.) However, you can scale your mining operation using other methods that may not involve getting large amounts of additional mining equipment online at your home, business, or other facility.

Some miners scale by replacing aging equipment, which in many cases, due to hardware efficiency gains, can result in significant increases in hash rate while maintaining similar, or even lower, energy expenditures, which would increase mining profits and possibly hasten ROI.

Other miners may choose to use hash-rate marketplaces to purchase mining capability from willing sellers. Another method to scale mining operations quickly is cloud mining where individuals can purchase large chunks of hash rate for their favorite cryptocurrency or algorithm from companies that specialize in managing mining equipment for miners.

Any of these options are decent choices for expansion, but some of them come with inherent third-party risk. See Chapter 9 for some pros and cons between the different mining deployment options. Do the profitability calculations we cover in Chapter 11 and know the risks of growing too quickly before diving into large new deployments of cryptocurrency mining equipment.

Finding Cheap Electricity

Inexpensive electricity is very important for cryptocurrency mining endeavors, as we mention in Chapter 11, because electricity is often the largest operational expenditure involved in cryptocurrency mining. Reduce your electricity cost, and you increase your profit, of course. Every dollar saved in electricity is a dollar that goes directly to your “bottom line.”

Some mining equipment may be profitable running in one place, but not in another, simply due to the difference in electricity costs between both locations. Some areas of the world have significant seasonal fluctuations in electricity prices, so there are even examples of nomadic cryptocurrency miners who move their operations periodically to take advantage of inexpensive and excess energy. Migratory miners!

Many enterprising miners have increased ROI by accessing energy resources that would otherwise go unused, with very little to no cost associated with them, in order to save significantly on electrical costs. These miners have resorted to capturing natural gas prior to being flared, excess hydroelectric capacity, wind, solar, or even geothermal energy.

Since mining equipment typically runs 24/7, it has electrical load characteristics, such as a high load factor, which some electrical utilities will provide discounts for.

An electrical load factor is a measure of electrical utilization rate over a given period of time. The equation for load factor is (Average Monthly Load in kW)/(Peak monthly load in kW) and is normally provided in percentages.

For example, if an S9 was running all month and didn’t shut off (as mining equipment typically does) and its peak load was 1.6kW, the load factor would be 100%: [(1.6 kW/1.6 kW) * 100%].

If you are running the equipment only half the time during the month, the load factor would be 50%: [(0.8 kW/1.6 kW) * 100%].

So it’s worth talking to your utility about the best rates they can provide, to see what rates would be tailored to the type of load pattern (a load factor that is close to 100%) that is inherent to most mining operations.

In some cases, it may even make sense for a miner to run mining rigs only during low-cost electricity periods during the day. But run the numbers carefully. Obviously it means you’ll mine less cryptocurrency, and you need to understand the effect on profitability when taking into account the capital costs of your equipment; run just half the day, and you’re doubling the time it takes to pay for that equipment.

For example, one miner we know recently switched to a new, hybrid residential/industrial rate that his electric utility introduced, which provides rates similar to industrial rates, saving him 20 to 40 percent on his energy costs compared to average residential rates in his area. This plan is a ToD (Time of Day plan) that saves money for people with high load factors — people who are running at a pretty steady, high load throughout the month.

If you’re like most electricity consumers, you have no idea you had choices, right? You simply pay the bill they send you each month. But spend a little time digging through your utility’s rate structure and spend some time talking to them, and you may be surprised what you find.

This really is a huge issue, in particular for miners who get beyond the hobbyist stage. Large, professional mines are all about finding cheap energy!

Cooling Efficiently

Mining equipment creates a lot of heat. We discuss this topic in Chapter 12, but you can mitigate this heat exhaust, or even use it to your advantage, to increase overall ROI.

Some miners spend a lot of money running expensive air-conditioning systems to cool cryptocurrency mining hardware to datacenter temperature levels. However, cryptocurrency mining hardware is equipped with large heat sinks and powerful fans and is typically rated for higher temperatures than sensitive data servers (such as web servers) being held in datacenters. This is a little scary for people who are used to the idea that computer equipment has to be cooled significantly. However, some miners really do play this game, running their equipment at higher temperatures. Many miners in Texas (not the coolest place in the world!) do not use cooling equipment and don’t mind the rigs’ intake air being just regular ambient temperature, which means a high temperature in that state. Tyler has his mining rigs running in 50 to 70° F air during the winter, and 70 to 90°F in the summer.

In fact, ASIC chips are often rated to run at high temperatures. For example, Bitmain recommends that its ASICs run in an ambient air temperature of 15 to 35°C or 59 to 95°F. (The company also claims in their documentation that the chips themselves can operate at temperatures as high as 127°C … 271°F! Don’t touch them!)

Miners may also avoid high cooling costs by operating in cooler climates and by circulating outside air through and out, bringing the temperature down to the outside ambient temperature. In cold climates, mining equipment may be used to heat rooms in homes or businesses. Mining equipment can even be spread around a home, comfortably heating multiple rooms rather than baking one single room. The drawback is that the gear is often very noisy. Even in a basement, you may be able to hear it upstairs. Some miners, however, have used liquid cooling and a heat exchanger to cool their equipment, which also quietens it.

Consider that if you heat your house with your mining equipment, you’re reducing the cost of heating your house. You normally won’t see this in your profitability calculations (see Chapter 11), though you may want to add your personal-heating savings to the profit to find your true profit.

But you would not want to include this number when calculating your taxes. In general, you can most likely count this reduction in personal expenses as a nice little bonus that the Internal Revenue Service doesn’t need to know about. (Of course, we don’t provide tax advice, so talk to your tax advisor!)

Some miners have even used immersion cooling for their hardware, using mineral oil or other engineered fluids as a dielectric insulator to protect equipment from electrical faults and to easily dissipate heat. Mineral oil conducts thermal energy well but doesn’t conduct electricity, so electrical mining equipment can be submerged into it and operate fine without failure. Miners then cool this fluid with thermal exchangers to dissipate the excess heat from the dielectric fluid.

Whichever strategy you end up using for cooling your mining equipment, reducing cooling costs as much as possible is an effective way to boost ROI.

Scoring Hardware Deals

Mining equipment hardware will be your largest capital investment. Being able to recognize and take advantage of savings on the original acquisition of the mining equipment is a great way to reduce your initial cost and ensure a quick ROI on that investment.

So you need to be a good shopper. Search online marketplaces, such as Craigslist, eBay, Amazon, NewEgg, and others to keep an eye out for discounted cryptocurrency mining hardware. Before buying a particular piece of equipment, do a quick search engine query and see whether you can find it cheaper. Have a really good understanding of what different types of equipment can and should cost.

Use the equations and online tools covered in Chapter 11 to find out whether that hardware is indeed profitable before buying, but be careful, as even these calculations can be misleading. Second-hand hardware may not be feasible to run in the long term due to market conditions changing, such as cryptocurrency exchange price, block difficulty, and increased network hash rate. Often deals that appear too good to be true may very well be; they may be great today, but have a short operational life.

If you’re on the hunt for the latest and greatest hardware, be prepared to pay a premium for the most efficient and highest hash rate mining devices. Run the numbers, and you’ll sometimes see that you’re better off using less efficient equipment that costs you less.

Also, sometimes it is best to buy new pieces of mining gear straight from the manufacturer to avoid unnecessary middleman price markups. Tread lightly with mining hardware acquisition, as it is likely to be the most significant contributor to your initial investment and the choices you make early on in your mining endeavor will greatly affect your ROI going forward.